Is Yoshitake (TSE:6488) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yoshitake Inc. (TSE:6488) does carry debt. But should shareholders be worried about its use of debt?

We've discovered 2 warning signs about Yoshitake. View them for free.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Yoshitake Carry?

You can click the graphic below for the historical numbers, but it shows that Yoshitake had JP¥1.03b of debt in December 2024, down from JP¥1.36b, one year before. But on the other hand it also has JP¥3.84b in cash, leading to a JP¥2.81b net cash position.

How Healthy Is Yoshitake's Balance Sheet?

According to the last reported balance sheet, Yoshitake had liabilities of JP¥2.18b due within 12 months, and liabilities of JP¥1.30b due beyond 12 months. On the other hand, it had cash of JP¥3.84b and JP¥3.02b worth of receivables due within a year. So it actually has JP¥3.37b more liquid assets than total liabilities.

This excess liquidity is a great indication that Yoshitake's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yoshitake boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Yoshitake

But the other side of the story is that Yoshitake saw its EBIT decline by 6.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yoshitake's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yoshitake may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Yoshitake recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yoshitake has net cash of JP¥2.81b, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥1.2b. So we don't think Yoshitake's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Yoshitake you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.